Many people are surprised to learn that being unemployed does not directly impact one’s credit score as employment status is not a data element considered by a credit bureau risk score. However, it may indirectly impact the credit score if a consumer’s credit behavior changes as a result of the loss of employment. For example, the score is likely to drop if the consumer starts to miss payments or begins building up credit balances as a result of the loss of income.
The exact impact on the credit bureau score of such behavior will vary by consumer as it depends on the new behaviors being reported and the other information already present on the file.
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In terms of being approved for a new credit obligation, your employment status may well be considered by the lender and have an impact on your ability to be approved. A lender will typically evaluate your credit risk (via a credit score), but also consider your ability to pay – in other words, do you have enough monthly income to meet the projected payment amount in addition to your other monthly expenses. The lender may have a policy rule to automatically decline the credit application if the applicant cannot prove a steady income stream. Or, they may consider the applicant more risky and potentially increase the interest rate of the loan or line.
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Be prepared if you are unemployed and thinking of applying for a loan in the future. Check your credit report several weeks before applying for the loan to ensure the data is accurate and get errors resolved as soon as possible. Before applying for any credit, try to check with the lender regarding their rules and criteria pertaining to employed status.
In the end, you may need to wait until you have found new employment before seeking new credit.
Image: “Dmitri” Beljan, via Flickr